Upload
warren-morrison
View
221
Download
0
Tags:
Embed Size (px)
Citation preview
The Balance of Payments Account Meaning of the balance of payments
The current account
trade in goods
The Balance of Payments Account Meaning of the balance of payments
The current account
trade in goods
trade in services
The Balance of Payments Account Meaning of the balance of payments
The current account
trade in goods
trade in services
balance of trade in goods and services
The Balance of Payments Account Meaning of the balance of payments
The current account
trade in goods
trade in services
balance of trade in goods and services
income flows
The Balance of Payments Account Meaning of the balance of payments
The current account
trade in goods
trade in services
balance of trade in goods and services
income flows
current transfers of money
The Balance of Payments Account Meaning of the balance of payments
The current account
trade in goods
trade in services
balance of trade in goods and services
income flows
current transfers of money
balance on current account
The Balance of Payments Account The capital account The financial account
investment○ direct○ portfolio
The Balance of Payments Account The capital account The financial account
investment○ direct○ portfolio
other financial flows (mainly short term)
The Balance of Payments Account The capital account The financial account
investment○ direct○ portfolio
other financial flows (mainly short term)flows to and from reserves
The Balance of Payments Account The capital account The financial account
investment○ direct○ portfolio
other financial flows (mainly short term)flows to and from reservesfinancial account balance
The Balance of Payments Account The capital account The financial account
investment○ direct○ portfolio
other financial flows (mainly short term)flows to and from reservesfinancial account balance
Overall balance of payments
The Balance of Payments Account The capital account The financial account
investment○ direct○ portfolio
other financial flows (mainly short term)flows to and from reservesfinancial account balance
Overall balance of payments Assessing balance of payments figures
The weights of the currencies of various countriesin the sterling exchange rate indexThe weights of the currencies of various countriesin the sterling exchange rate index
Exchange Rates
The rate of exchangeindividual rates of exchangeexchange rate index
Determination of exchange rates
Exchange Rates
The rate of exchangeindividual rates of exchangeexchange rate index
Determination of exchange ratesthe equilibrium exchange rate
1.00
1.20
1.40
1.60
1.80
2.00
2.20
0
$ pr
ice
of £
Q of £
Determination of the rate of exchangeDetermination of the rate of exchange
1.00
1.20
1.40
1.60
1.80
2.00
2.20
0
$ pr
ice
of £
D by USA
Q of £
Determination of the rate of exchangeDetermination of the rate of exchange
1.00
1.20
1.40
1.60
1.80
2.00
2.20
0
$ pr
ice
of £
QS
S by UK
Q of £
Determination of the rate of exchangeDetermination of the rate of exchange
D by USA
QD
b a
1.00
1.20
1.40
1.60
1.80
2.00
2.20
0 QS QD
d$ pr
ice
of £
Determination of the rate of exchangeDetermination of the rate of exchange
S by UK
Q of £
c
D by USA
Exchange Rates
The rate of exchangeindividual rates of exchangeexchange rate index
Determination of exchange ratesthe equilibrium exchange rateappreciation and depreciation
Exchange Rates
The rate of exchangeindividual rates of exchangeexchange rate index
Determination of exchange ratesthe equilibrium exchange rateappreciation and depreciationshifts in currency demand and supply
0.60
0.80
1.00
1.20
1.40
1.60
1.80
0
Floating exchange rates: movement to a new equilibrium
€ / £
S1
D1
Q of £
0.60
0.80
1.00
1.20
1.40
1.60
1.80
0
€ / £
S1
D1
S2
Q of £
Floating exchange rates: movement to a new equilibrium
0.60
0.80
1.00
1.20
1.40
1.60
1.80
0
€ / £
S1
D1
S2
D2
Q of £
Floating exchange rates: movement to a new equilibrium
Exchange Rates
The rate of exchangeindividual rates of exchangeexchange rate index
Determination of exchange ratesthe equilibrium exchange rateappreciation and depreciationshifts in currency demand and supply
○ differences in interest rates
0.60
0.80
1.00
1.20
1.40
1.60
1.80
0
€ / £
S1
D1
S2
D2
Q of £
Floating exchange rates: movement to a new equilibrium
Exchange Rates
The rate of exchangeindividual rates of exchangeexchange rate index
Determination of exchange ratesthe equilibrium exchange rateappreciation and depreciationshifts in currency demand and supply
○ differences in interest rates○ differences in inflation rates
0.60
0.80
1.00
1.20
1.40
1.60
1.80
0
€ / £
S1
D1
S2
D2
Q of £
Floating exchange rates: movement to a new equilibrium
Exchange Rates
The rate of exchangeindividual rates of exchangeexchange rate index
Determination of exchange ratesthe equilibrium exchange rateappreciation and depreciationshifts in currency demand and supply
○ differences in interest rates○ differences in inflation rates○ relative investment prospects
0.60
0.80
1.00
1.20
1.40
1.60
1.80
0
€ / £
S1
D1
S2
D2
Q of £
Floating exchange rates: movement to a new equilibrium
Exchange Rates
The rate of exchangeindividual rates of exchangeexchange rate index
Determination of exchange ratesthe equilibrium exchange rateappreciation and depreciationshifts in currency demand and supply
○ differences in interest rates○ differences in inflation rates○ relative investment prospects○ change in aggregate demand
0.60
0.80
1.00
1.20
1.40
1.60
1.80
0
€ / £
S1
D1
S2
D2
Q of £
Floating exchange rates: movement to a new equilibrium
Exchange Rates
The rate of exchangeindividual rates of exchangeexchange rate index
Determination of exchange ratesthe equilibrium exchange rateappreciation and depreciationshifts in currency demand and supply
○ differences in interest rates○ differences in inflation rates○ relative investment prospects○ change in aggregate demand○ speculation
0.60
0.80
1.00
1.20
1.40
1.60
1.80
0
€ / £
S1
D1
S2
D2
Q of £
Floating exchange rates: movement to a new equilibrium
Exchange Rates and Balance of Payments
Exchange rates and the balance of payments: no government intervention
a floating exchange rate
○ how rates are determined by dealers
automatic balancing of overall balance of payments
current, capital and financial accounts may not separately balance
Exchange Rates and Balance of Payments Exchange rates and the balance of
payments: government interventionreducing short-term fluctuations
○ using reserves○ borrowing from abroad○ changes in interest rates
maintaining a fixed rate of exchange over the longer term○ deflation / reflation○ supply-side policies○ import controls
Fixed versus Floating Exchange Rates Advantages of fixed exchange rates
certaintyno speculation (if rate is absolutely fixed)prevents 'irresponsible' government policies
Disadvantages of fixed exchange ratesconflicts with other macro objectivesdanger of competitive deflationsproblems of international liquiditydifficulties in adjusting to shocksspeculation
Fixed versus Floating Exchange Rates Advantages of free-floating rates
automatic correctionno problem of international liquidity insulation from external events less constraint on domestic macro policy
Disadvantages of free-floating ratespossibly unstable exchange ratesspeculationuncertainty for business
○ but use of forward markets lack of discipline on economy
$ / £
$1.00
$1.20
$1.40
$1.60
$1.80
$2.00
$2.20
$2.40
1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002
70
80
90
100
110
120
130
140
150
$ / £ exchange rate and £ exchange rate index: 1976-2003
$ / £
$1.00
$1.20
$1.40
$1.60
$1.80
$2.00
$2.20
$2.40
1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002
70
80
90
100
110
120
130
140
150
$ / £ exchange rate and £ exchange rate index: 1976-2003
$ / £ exchange rate and £ exchange rate index: 1976-2003
$ / £Index
1990=100
$1.00
$1.20
$1.40
$1.60
$1.80
$2.00
$2.20
$2.40
1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002
70
80
90
100
110
120
130
140
150
$ / £ exchange rate and £ exchange rate index: 1976-2003
$ / £Index
1990=100
$1.00
$1.20
$1.40
$1.60
$1.80
$2.00
$2.20
$2.40
1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002
70
80
90
100
110
120
130
140
150
The Origins of the Euro Post-war regulation of exchange rates
the Bretton Woods systemits collapse in the early 1970sdirty floating
The ERMfeatures of the ERMthe 1980scrisis in the ERM
○ events of 1992○ events of 1993
a return of calm
Globalisation and the Problem of Instability
Interdependence through trade
international effects of changes in aggregate demand
vulnerability of open economies
Financial interdependence
size of international financial flows
international effects of changes in interest rates
Globalisation and the Problem of Instability
The need for policy co-ordinationthe search for policy co-ordination
○ G7/G8 meetings: attempts at harmonisation
○ but lack of convergence
Difficulties in achieving harmonisationdifferences in budget deficits and debt
interest rate divergence
different internal structures of economies
politicians more concerned with domestic issues
Debt and Developing Countries Origins of the debt problem
borrowing to finance developmentthe 1973/4 oil shockthe 1979/80 oil shock
○ world recession fall in export earnings○ fall in commodity prices (exports)○ high interest rates cost of servicing debt
Rescheduling debtrescheduling official loansrescheduling commercial bank loans
Debt and Developing Countries Dealing with debt
structural reformsIMF structural adjustment programmes
○ tight fiscal policies to reduce budget deficits○ privatisation and market liberalisation○ open trade policy○ hardship from IMF programmes
debt forgiveness○ HIPC initiative
successes / failures to date
○ pressure to cancel debts